The vehicle parts sector hasn’t had a great 2021, with concerns about shrinking vehicle production schedules in response to semiconductor shortages as well as margin pressure from cost inflation and supply chain challenges contributing to weak investor sentiment. Tenneco (TEN) has been doing better than most, though, and does at least have a year-to-date gain to show for itself, despite a roughly 11% drop since my last update.
I’m getting more positive on these shares again, as I think the weakness may be getting a little excessive. Management’s expectations seem rooted in reasonable, if not conservative, assumptions about OEM production schedules and margin leverage opportunities (or lack thereof), and the company continues to make progress on internal cost efficiency efforts and deleveraging.
Vulnerability to passenger vehicle electrification remains a long-standing worry here, as does the high level of leverage, as it will likely take another five years or so for Tenneco to get rid of its excess debt (which I define as net debt above 2x forward EBITDA). Opportunities in advanced suspension products, aftermarket parts, and commercial vehicle (and industrial) markets shouldn’t be overlooked, though, and I can argue for a fair value in the high teens today.
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